Prudential will relaunch its controversial £24bn offer for Asian rival AIA this week after winning over UK regulators with plans to create a £1bn rainy day fund, dubbed "Armageddon money".

Marathon weekend talks with the Financial Services Authority brought the two sides close to a resolution last night with insiders hopeful that the insurer will be able to launch its prospectus, which will include the details of a £14bn fundraising, by Wednesday at the earliest.

The reputations of Prudential chief executive Tidjane Thiam and chairman Harvey McGrath were shredded last week after the City watchdog forced the company to delay publishing details of the deal and record-breaking cash call amid concerns about the amount and type of capital the enlarged group would have in reserve.

Sensitive to the criticism it received for allowing Royal Bank of Scotland to run its capital ratios down to buy ABN Amro – an aggressive deal that contributed to the implosion and subsequent bailout of the Edinburgh-based bank – the FSA is watchful to prevent financial institutions from overstretching themselves.

To appease the regulator, it is understood the Prudential has agreed to alter the debt structure of the deal in a way that boosts its capital surplus under the so-called insurance group directive – a pot of extra cash the European Union demands insurers hold for times of economic hardship.

The cash has been dubbed "armageddon money" by Prudential insiders, a reference to the FSA's stress tests, updated in the wake of the credit crunch, which demand the insurer has sufficient reserves to withstand a 1 in 100 year downturn.

Prudential and the FSA declined to comment.

Getting the FSA on side is just one of the headaches faced by Thiam and McGrath who not only have to contend with an increasingly mutinous shareholder base but also with jittery world markets and the uncertainty created by a hung parliament.

Shareholders had described the company's lack of prior agreement with the regulator as "inept" and "shambolic". Even before the surprise delay, Thiam had faced criticism for launching a takeover that was too expensive and overly ambitious for an executive who at the time had been in charge for just six months.

In one weekend report, an unnamed shareholder described Thiam as a "dead man walking". Another investor was quoted as saying: "To have run into a delay, at the last minute, in your home country, with a regulator you might be expected to know best, does not build confidence that management have covered all the bases."

Robin Geffen, founder and managing director of Neptune Investment Management which owns some $50m of Prudential shares, went further. "This isn't a transformational deal – this is a disastrous deal," he was reported as saying. He is trying to win the support of 10% of the Prudential's shareholders for a resolution calling for Thiam to go and has launched a website – www.prudentialactiongroup.com – to gather supporters tomorrowthis morning.

A shareholder vote on the rights issue, which would be one of the biggest in British corporate history, is pencilled in for 27 May, but given the hiatus Prudential admitted last week that "all aspects" of the bid timetable were now up in the air.

That means the company runs the expensive risk of not completing the deal by the deadline of 31 August. The insurer faces $104m (£71m) a month in penalty fees if it goes beyond that date. The rest of the funding is in bank loans and the issue of new shares to AIA shareholders.

Analysts are increasingly of the view that shareholders will torpedo the deal and that a breakup of the businesses would deliver a better result for shareholders anyway.

Prudential made its surprise move for AIA at the end of February. The company is the Asian operation of AIG, the American insurance group that received the world's biggest government bailout at the height of the global financial crisis, and is considered the jewel in AIG's crown.